Cost income ratios in traditional banks remain high. The average (across all types of bank) in Europe remains at 65% in Europe
barely moving in spite of radical cost cutting and branch closures. Throughout the COVID crisis the emergency measures needed have pushed ratios higher – in some cases to 100%.
Although neo banks are beginning to see costs rise as they add more staff
, they remain significantly lower. Not only are they more productive with ratios around 40%, but it gives them flexibility and agility to pivot to meet emerging market needs.
Fin-techs and Neo Banks benefit from much leaner operations. Not only are few encumbered by extensive branch networks, but they have none of the legacy systems and processes that have built up in high street banks over decades. They tend to be focused on customers and have a tightly defined view of who and what they need. Of course, this means that they are seldom the only financial services relationship their customers have, and they cannot offer the breadth and depth of service of high street banks. However, their agility means they can react quickly to new opportunity and rapidly introduce new products and services to meet specific needs. This capability is crucial to thriving in today’s fast paced market and is something that high street banks need to adopt. Two critical mindset shifts are necessary to meet these new challenges.
In-person becomes the exception
First, high street banks need to change the way they think about their operations. Today, despite significant investments in digitalisation, most banks still expect to interact with customers in branch, by phone and online in that order. They must start shifting to become ‘digital only’ or digital, mobile-first’ organisations to compete with fin-techs, neo banks and ‘big Tech’ new entrants. That’s not to say that the bank of the future will have no branches. Banks will want to retain some branches to a variety of reasons – anything from providing accessible services for vulnerable customers to high-end experiences for specific segments. But it is likely that for most customers in-person banking and call-centre contact will become the exception rather than the norm.
This shift in thinking unleashes significant organisational savings. These derive not just from reducing real estate and staff costs, but in re-organising the way the bank operates to focus everything on the customer. Instead of org-charts that arrange by geography, product or historic ownership and create overlaps, duplications and redundancies, resources can be orchestrated to match the different stages of the customer journey. Data flows in support of these stages ensuring that, at every stage, all the information is in place to support excellent customer experiences whilst managing risk and ensuring full auditability. One trusted source of data dissolves silos and promotes re-use of the same data and models to support a range of customer interactions.
No more hand-cranking
The second shift is to a single data infrastructure to supports these approaches. Leading with responsive digital channels is essential, but hand-cranked information process in the back office will torpedo any speed, efficiency and service-level gains. Concerns over governance and risk, not to mention the protection of personal fiefdoms, have held-back efforts to create a single trusted source of data. Manual processes and ‘swivel-chair’ integrations create unnecessary costs. They harm banks’ ability to understand its customers, develop and launch the services they want. Using data to create value must be at the heart of the Bank of the Future’s core operating model. They can be assured that proven technologies such as Teradata Vantage provide the security, governance and auditability as well as the flexibility and power to create and deploy analytics at scale across the modern hybrid multi cloud analytical environment.
Change is possible
Leaders across the banking world know this. But until now the pressure to change has not outweighed the inertia of established operational structures. Stagnant profitability, and limited remaining levers of cost cutting, plus increasingly effective competition, are changing this dynamic. The COVID pandemic as a ‘Black Swan’ event showed what can be done quickly in extremis, and banks are beginning to challenge assumptions about what can and should be changed. The cloud is also creating an impetus to speed. New, scalable, as-a-service infrastructures are changing the risk/reward calculation of moving to new platforms. Subsequent blogs will illustrate how multi cloud data warehouse architectures can deliver the cost savings, efficiency scalability and speed that modern banks require.
Rapid, radical change is not only now increasingly necessary, but increasingly possible. Automation, AI-decision making, and digital-only options are changing banks’ views of what can and should be done. For the first time in decades, the catalysts for change are aligned with the capacity for change. Leaders should not let this opportunity pass but use it to challenge the assumptions which have stymied progress towards more streamlined, automated and digital processes in the past. Change needs to be driven from the top, and the benefits to the bank championed over concerns of individual departments. The next blog will look at the practical steps to automating as much as possible.